Houston Democrats

First, according to the Bureau of Labor Services, wages for non-supervisory employees have grown 13.24% from January 2001 to July 2005. Over the same time, inflation increased 11.59%, making inflation adjusted wage growth a paltry 1.6% over a five and a half year period. In other words, what most people made in January 2001 is about what they made in July 2005, after inflation adjustments.

However, according to the Bureau of Economic Analysis, the US economy started to expand in the first quarter of 2002. Remember: consumer spending represents about 2/3 of US GDP. Wages haven’t increased in about 4 ½ years and personal savings are now at 0%. Where did the financial engine for 3 ½ years of growth come from?

Housing. Housing is the single most important asset class in the US right now.

Others can be found in a regular report from the Federal Reserve, the "Balance Sheet of Households and Non-Profit Institutions," one of the many sections of the quarterly Flow of Funds.

If you examine these figures, you learn that our collective net worth declined from 1999 (no surprise there) and bottomed in 2002. You also learn that we had fully recovered by 2003 and that we've [the US] gained $9.4 trillion in net worth — nearly 25 percent — from the 2002 bottom.

The largest source of gain? Home values, up $4 trillion. (This compares with a $1.3 trillion gain in the value of corporate equities and a $1.3 trillion gain in the value of mutual funds.).

Examining the same data back to 1952, I found that:

Residential homes are the highest percentage of our collective net worth they have ever been, 36.3 percent.

We have been borrowing at a prodigious rate, with mortgages equal to 43.7 percent of home value. That's only a bit less than the record 44.2 percent set in 2004.

We reached a record for the value of homes compared to the value of our financial assets, 48.5 percent.

Compared to the median values of the past 50 years, these are big shifts. Viewed statistically, values are at extremes.

Housing is now the single most important financial asset for the vast majority of Americans. It is no longer their 401k or non-retirement stock portfolio. It is their house – or houses. And Americans have used this asset to fund the recent expansion.
According to the Federal Reserves most recent flow of funds report, total mortgage borrowing increased from 4.64 trillion in 2001 to 9.04 trillion in 2004. In addition, according to the Federal Reserve, household debt service payments now comprise 18.45% of disposable income.

Wages increases and spending from savings have not added to GDP growth: housing debt has. The US consumer has used his house like a credit card to maintain his standard of living and increase GDP growth. When housing stops appreciating in value, the main financing vehicle of the US economy will slowly dry-up. When this happens, the consumer will no longer be able to spend in a way that increases GDP. Instead he will have to start making payments on what he has already spent.

This is why the housing bubble is so dangerous. When housing stops appreciating in value, the US consumer’s focus will shift from spending on current purchases to making payments on past purchases. He will no longer be able to take out another loan to buy a good because his main source of financing is no longer viable. 2/3 of the US economy will slow, hurting the entire economy – not just selected regions.

This is why the loss of 3.6 million high-paying manufacturing and high-tech jobs over the last 5 years and the lack of wage growth is so dangerous. US economic expansion depends on the appreciation in value of a single assets class. We have collectively put all our eggs in one financial basket, exposing ourselves to the risk inherent to that asset. This is reckless financial planning of the highest order.

When housing slows, we will pay the price.

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